Lenders and home buyers are constantly referring to "points" when talking about mortgages.
This is a fancy term for the considerable fees you pay when you take out a loan. One point
is equal to 1% of your loan amount. So, if you need a $150,000 mortgage and you have to pay
one point in fees, that charge equals $1,500. Lenders refer to points variously as
loan-origination fees, discount fees or buy-down fees.
Like the interest you'll pay each month, points are essentially finance charges -- only you
pay them up front. Lenders blend them with interest rates to come up with the
characteristics of the loan. For example, the more points you pay up front, the lower the
interest rate the bank will charge you over the course of the loan. Also, like interest,
points are 100% tax deductible in the year you pay them.
There is a science to figuring out how many points you should pay under what circumstances.
Sometimes you can opt out of paying points altogether, taking higher monthly payments
instead.
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